Disclosing the current and anticipated financial effects of climate risks and opportunities

It is only a matter of time before climate reporting becomes mandatory in Australia. When this happens, entities will be required to include climate-related financial disclosures in a separate sustainability report, as part of their annual report. These climate-related financial disclosures must address information about climate-related risks and opportunities, and specifically address governance, strategy, risk management, and metrics and targets.

Why is this sustainability strategy disclosure needed?

One of the aims of this disclosure is to improve the interconnectedness of information disclosed about the effects of climate-related risks and opportunities in financial statements with that disclosed in climate reports. This is particularly important because an entity’s actions and promises today may not impact its financial statements until much later. In other words, financial statements and climate reports won’t always align. Tying together climate strategy information and financial information, therefore, gives the user a better idea of both the current and future effects of the entity’s climate transition plan.

Examples of mismatch

To illustrate this mismatch, we can look at an example of an entity that intends to retire its fleet of petrol vehicles. Say the vehicles have a remaining useful life of three years but the entity decides to retire these assets from use immediately. This climate response will be recognised in the current period financial statements via an impairment loss in the current period because the entity has already actioned this promise. On the other hand, if the entity announces that it will retire these vehicles in five years, at the end of their useful lives, this will not hit the financial statements until a future date, when the vehicles are withdrawn from use.

Required disclosures

Paragraphs 15 to 21 of IFRS 2 Climate-related Disclosures outline the disclosures about the current and anticipated effects of an entity’s climate risks and opportunities on its financial performance, position and cash flows. In summary, an entity must disclose:

• Both qualitative and quantitative information (quantitative information can be provided as a single amount or a range)
• How climate risks and opportunities affected the financial position, performance and cash flows in the current period
• Information about the above climate risks and opportunities for which there is a significant risk of material adjustment to the carrying amounts of assets and liabilities in the next annual reporting period
• How the entity expects its climate strategy to affect its financial position over the short, medium and long-term, taking into account its investment and disposal plans and planned funding sources
• How the entity expects its climate strategy to affect its financial performance over the short, medium and long-term – for example, increased revenue from products aligned with a lower carbon economy, costs arising from physical damage to assets from adverse climate events, and expenses to adapt or mitigate climate change.

Relief from providing quantitative information

There is relief from providing quantitative information about the current or anticipated financial effects of a climate-related risk or opportunity if the entity determines that either:

• Those effects are not separately identifiable, or
• The level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful.

Relief is also available if the entity lacks the skills, capabilities or resources to provide quantitative information. In such cases, the entity will instead explain why it has not provided quantitative information, provide qualitative information about those financial effects, and provide quantitative information about the combined financial effects of climate-related risks and opportunities.

Proportionality

In preparing these disclosures, entities must use all reasonable and supportable information available at the reporting date without undue cost or effort. An exhaustive effort is not necessary but one cannot argue that no effort is required. Entities must also use an approach that is commensurate with the skills, capabilities and resources available (both internal and external).

More information

Please watch two recent IFRS Foundation webcasts which explain these strategy disclosures in more detail, and provide examples of how climate-related risks and opportunities impact the financial and climate reports in different ways. The first webcast explains the overarching requirements and the current financial effects of climate-related risks and opportunities. The second deals with the anticipated financial effects as well as available mechanisms to address application issues and proportionality.

How BDO can help

Preparing your first climate disclosures and determining how your climate strategy has affected your current and future financial performance, position and cash flows can be a daunting task. Our sustainability reporting experts can help you understand what this might mean for your organisation.

Contact us today.